Watch Out for Mr. Downside

The recent poor action in the indices finally spread to the hot pockets and speculative favorites and gave us downright ugly action today. There was a minor bounce in the last few minutes, but it did little to take the sting out of a very aggressive downside reversal. What was different today was that virtually nothing was spared. Breadth was better than two-to-one negative and the screens were littered with stocks that went from new highs to red.

In 2013, this sort of sell-off never seemed to last for long. As soon as you took some defensive steps, it would reverse and, more often than not, go straight back up. While it is possible that will occur again, I'm not betting on it. As I've noted for the last few weeks, this market has undergone a change in character since the year started. Most notably, there simply has not been much dip-buying and the indices have not seen any momentum.

On a day like today, I see no choice but to play defense and be prepared for further downside. Last year that often felt foolish, but it is far more important that we protect capital rather than roll the dice and hope that the dip-buyers will rescue us again.

If you have been trading this market, it was hard not to give something back today. That is the nature of the beast, but the important thing is to make sure you don't keep bleeding if the market doesn't immediately turn back up. Right now, the odds favor further downside.

Have a good evening. I'll see you tomorrow.

Jan. 13, 2014 | 1:10 PM EST

Weak Action Threatens to Spread

If Friday's lows are breached, it will likely trigger stops.

The market was unable to gain traction this morning and now the weak action is spreading. Breadth is falling and there are many pullbacks on the screen. The market has had a tendency to come back late in the day recently, but the concern is that the pockets of momentum are shrinking and the speculative action is drying up. There are still a few things holding on, but this action has me a little worried and I'll be more cautious if today's finish is weak.

I keep writing about how the character of the market has shifted in these first weeks of 2014. One thing we could always count on in 2013 was the dip-buyers showing up and preventing downside momentum from building. The dip-buyers have not been around much in 2014 and if we start breaching some support levels, it is going to be a very different market.

The way to play this is to tighten up stops and be ready to shift to a more defensive stance. Above all else, protect gains. Good stock-picking has produced relative outperformance recently, and it is very easy to give back if you aren't careful.

We are on the verge of breaching Friday's lows, which will likely trigger stops.

Jan. 13, 2014 | 10:56 AM EST

A Sleepy Start to the Week

A big change in the action compared to last year at this time.

Eight trading days into 2014, the indices continue to be lethargic, though there are pockets of action under the surface. It has been all about stock-picking so far this year. If you haven't been in the right names, the market hasn't been bailing you out.

It has been a sleepy Monday, which is another change from last year when the action often gapped up and ran to start the week. This morning, breadth is running 2,400 gainers to 2,800 decliners. The main pocket of strength is biotechnology again, despite the sharp drop in Intercept Pharmaceuticals (ICPT), which helped the explosion in the group last week.

The action in the indices has some bulls worried, but as long as the trading in individual stocks remains good, it doesn't worry me. In bad markets, the stock-picking is more challenging, and that is not what we are seeing so far.

The more interviews that an expert had done with the press, Tetlock found, the worse his predictions tended to be. -- Nate Silver

As we kick off the second full week of 2014, the market is looking quite different from how it did in 2013. The only major index showing a gain so far is the Russell 2000, while the Dow lags with a loss of 0.84%.

Although the indices look quite lackluster, there has been no shortage of interesting trading action under the surface. This started off with some aggressive speculative action in China "junk" names, and we've seen biotechnology and solar energy continue their leadership roles. Big-cap momentum names have been mixed but, as I discussed this weekend, a new group of "Four Horsemen" is leading the charge.

The big question is whether this is just a temporary aberration, or if have we seen the character of the market undergo a fundamental shift. The big change recently has been the commencement of tapering by the Federal Reserve. We rode on the Fed coattails for years as the central bank pumped liquidity into the market, but that will no longer be the case starting this year -- although the Fed isn't exactly reversing course yet.

The Wall Street Journal has a front-page article this morning that sums up the dilemma for investors with the following comment: "The uncharacteristic dip is leaving investors in a tough position: Selling now could protect them from further declines but could also mean they would miss out on the gains most experts are still forecasting for stocks this year."

That last comment -- that most experts are still forecasting gains for the year -- strikes me as downright ridiculous. Do people actually base the way they trade the market on forecasts by experts who, as a group, have an absolutely abysmal record of prediction? I sure don't know anyone who thinks that way, but I guess they probably aren't reading Real Money.

My point is that this market is acting differently, and we have to be ready to adapt if this continues to play. The "experts" are clueless. Forget what they have to say about the market gaining again over the course of the year. Our goal is to protect capital and then capitalize on opportunities as they arise. Long-term forecasts aren't going to help us do that. We have to watch conditions develop and react as they change.

So far, despite the struggling indices, it has been a good market for active traders and stock pickers. Positive seasonality ends as we head into earnings season, and we now have the very poor jobs report from Friday as a reminder that the U.S. economy is still trying to gain some traction.

We have a negative start to the week setting up, as well as more concern about what happened to all the buying that the "big boys" were supposed to do when they came back to work. For some reason that doesn't seem to respect the predictions from the "experts."

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